California Political Review

As Governor Arnold Schwarrenegger begins his second term, his chief priority is health reform. We hope he can open the path to universal choice in health care by br caking the deadlock between the status quo - inflexible, expensive, and out of touch - and a competing ideology of even more government control. So far, the signals have been decidedly mixed.

The governor rejected "socialized" health care in 2006, vetoing Sheila Kuehl's 5B-840, a bill to impose a government monopoly system. His pre-re-election platform, however, consisted largely of promising to spend more money to expand government programs - especially the popular, but relatively unimportant notion of "covering all kids" (the people who cost money are at the other end of the age spectrum). He also collaborated with the Democrat majority to introduce a plan for state control over prescription drug prices for uninsured Californians - a plan likely to be found in violation of federal Medicaid laws - and ignored a proposal made by the organization we work for, The Pacific Research Institute, to create incentives for drug makers to reduce prices voluntarily,. at little or no cost to taxpayers. (Available online at: http://www.pacificresearch.org/pub/sab/health/2005/Prop78vs79.pdf)

Since the election, he has been pushing the tired notion of "covering the uninsured," or at least half of them. On health care, the governor shows zero recognition that the state, not market failure, has caused our current trouble. Politicians' schemes to "cover the uninsured" are like making it impossible to get a car and then guaranteeing you bus fare. Pacific Research Institute will publish a briefing paper in early January zeroing in on the ill-advised government policies at the root of the system's "affordability" crisis and derailing reforms designed to alleviate them. To help start the discussion, we summarize those reforms here.

We propose five steps that will have more positive impact than the direction the governor appears likely to urge on the state: Tax deductibility of Health Savings Accounts; Health Opportunity Accounts in Medi-Cal; freeing Nurse Practitioners to compete in urgent and primary care; deregulating private insurance; and designing a "Connector" that would break down the wall between employer-sponsored health insurance and the individual market.

First, the Golden State must increase the adoption of Health Savings Accounts (HSAs) by giving Californians the same tax break the federal government does. HSAs are a kind of 401 (k) for health. Contributions and earnings are non-taxable federally, and your HSA is your property for life. Preliminary evidence shows that HSAs foster personal autonomy in a crippled system that leaves Americans far too dependent on employers and restrained by government regulations to take responsibility for their own health.

HSAs are not the definitive solution to all healthcare problems, but they are a smart step forward. About half of HSA purchasers in the individual market are more than 40 years old, and 23 percent are less then 20. Surveys suggest that 31 to 45 percent of Americans with HSA-qualified health plans earn less than $50,000 a year, and 25 percent have incomes of $35,000 or less. Between one third and one half were previously uninsured. California has the second-highest income taxes in the country after Vermont, but Democrat legislators have blocked efforts to make HSAs tax deductible. Governor Schwarzenegger should continue to push for repeal of this unfair taxation of HSAs. This reform is long overdue.

Second, the same medicine of personal autonomy is now available for Medi-Cal. Some states are developing "consumer-directed Medicaid," which the federal government has just made even easier through Health Opportunity Accounts (HOA) - HSAs for Medicaid. Established under the federal Deficit Reduction Act of 2005, HOAs will put money under beneficiaries' control, enabling them to engage the health services they need while bypassing government bureaucracy.

Similar programs have shown success for disabled, housebound beneficiaries who stop being passive recipients of government handouts and take more control of their lives. States offering HSAs will encourage and empower individuals to choose physicians and insurers that serve their needs. The governor should promote reforms such as these, which will wean beneficiaries away from dependence on government, rather than expanding eligibility for Medicaid enrollment.

Third, these newly empowered Californians will want to spend their health dollars more effectively. They deserve the freedom to choose physician-owned or even "retail" clinics rather than acute-care hospitals for a variety of procedures. Retail clinics employ nurse practitioners (NPs), a good alternative for certain types of primary care as more physicians specialize. Both physicians and NPs, a recent study shows, believe that increasing the autonomy of nurse practitioners will improve care for the chronically ill.

The governor should call for reform of current law that requires a supervising physician to look after no more than four NPs at any given time. This harmful rule limits NPs' autonomy and has effectively prevented the growth of these retail clinics in our state. If deregulated, the clinics would advance care for patients who currently flood the waiting rooms of emergency care centers to the detriment of hospitals and patients.

Fourth, we should deregulate the California insurance market so that insurers can compete, offering a more cost-conscious population the insurance plans that best suit their health-care needs. Newly elected Insurance Commissioner Steve Poizner appears to understand the need for competitive, flexible private health care. Poizner opposes mandated benefits, which limit choice and increase the cost of health insurance. California ranks in the bottom 10 states when it comes to unnecessary mandates, according to the Council for Affordable Health Insurance. The governor should work closely with Poizner to reduce unnecessary regulation and increase competition in health insurance.

Finally, should Schwarzenegger propose a version of the much discussed Massachusetts health-care plan, he should avoid mandates on individuals and businesses tax increases by another name. The main advantage of the Massachusetts plan is the "Connector," which matches all buyers and sellers of health insurance on a tax-advantaged basis, thereby eliminating the bias in favor of employer-sponsored health care that reduces individuals' freedom to buy insurance that best suits their needs. If the governor can propose a narrow Connector without the burdensome regulations applied in Massachusetts, he will do his state a great service.

California can break the mold in 2007 by making health care more patient-focused and less bureaucratic. We can become the free market health-care model for states across America, reducing dependency on ever-growing government programs. Let's promote competition among providers, and empower Californians with tax deductible savings, choice, and quality health care. California is ready for choice in health care.